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June 16, 2014

Investors Take Notice: Victorious ANC Focusing on South Africa’s Economy

It’s been 20 years since the African National Congress (ANC) came to power in South Africa with the promise of creating a just nation with equal opportunity for all. But although the country has undergone dramatic changes in that time, it nevertheless faces a host of problems today that must be addressed if South Africa is to move forward.

The question, though, is whether the ANC and President Jacob Zuma are up to that task, and whether redressing South Africa’s problems, in particular the many economic challenges it faces, are on its to-do list.

The ANC emerged victorious once again in South Africa’s recent election, and as the vanquisher of Apartheid, it still holds enormous goodwill with many South Africans, said Ryan Hoover, an investment analyst at Africa Capital Group who also maintains the website www.investinginafrica.net and spent several years in South Africa. However, the election results have clearly shown that the party’s support is waning (it got 62% of the vote compared to 66% in the last elections), as many South Africans have become increasingly frustrated with the ANC.

“South Africa's chief economic challenge springs directly from its chief social challenge –an ever-widening gap between the haves and have-nots,” Hoover said. In the 20 years that the ANC has been in power, “income inequality has actually increased, official unemployment rates hover around 25%, White South Africans continue to control the majority of the country's productive assets and the education system is ranked one of the worst in the world.”

It is little wonder, then, that frustration with the ANC is beginning to give way to a sense of betrayal among more and more South Africans, particularly the middle classes.

Ironically, one of the greatest hallmarks of ANC rule is the emergence of a solid black middle class in South Africa, said Riaan Nel, managing partner of Detlefsen Nel & Associates in Eugene, Or., and a former member of the constitutional assembly that finalized the negotiations between the ANC and the previous governing party of South Africa.

“The rise of the Black middle class and upper income class has really been significant and that is a good thing because at the end of the day, all well functioning democratic and market oriented economies need a good middle class,” Nel said. “Although low income blacks still outnumber middle class blacks, the interests of the middle class – better education, more efficiency and so on – is definitely being heard, as we can see from the recent voting, and it is among that group that the ANC has lost support.”

One of South Africa’s most pressing problems and an issue that’s of particular concern to the rising Bblack middle classes and entrepreneurs is its extremely rigid labor market. Growth is just not fast enough to create jobs and absorb new entrants, Nel said, and although South Africa, like its BRIC and emerging market peers, has been a victim of the reversal of capital flows from the developing to the developed world, the structural problems in South Africa are the root cause for waning foreign investor interest in South Africa, Nel said.

“We’ve seen some foreign investment flowing to other places in Africa that are growing faster than South Africa, like Nigeria, and though South Africa has great potential, the inefficiency of the government and the rigidity of labor laws means that many investors have lost interest,” Nel said.

But Nel isn’t too optimistic that things are going to change anytime soon, though. And even if the South African economy continues to chug along at a sluggish, below-par growth pace, “it’s going to take a lot of political courage and will to transform the structure of the economy to start growth on all cylinders,” he said.

On the bright side, South Africa boasts the best physical infrastructure and most developed capital market on the continent, Hoover said.

“So, over the long term, I believe South Africa will continue to be the chief gateway into the sub-Saharan region, and its companies will continue to reap the benefits of expansion there,” he said.

South Africa is Africa’s largest economy and has always been sought after for its wealth of natural resources, even as investors have, through the years, also recognized the high caliber of its financial markets, regulation and sophistication.